| Once upon a timeOnce upon a time, many years | | | | consignment program involves a level of |
| ago there was a young, ambitious salesman | | | | overhead that may not be supportable on low |
| selling flat rolled steel. This energetic | | | | turnover items.- Integrity of customer. No |
| young man called on one potentially large | | | | matter how thorough your consignment |
| account for months and months with zero | | | | agreement, all such programs involve a high |
| success. He was going nowhere fast. The only | | | | level of trust between parties. How easy are |
| thing he got from the rather large, burly | | | | they to do business with?It is very |
| looking professional purchasing agent was | | | | important, then, to complete a diagnostic |
| frustration. The purchasing agent knew the | | | | review. The diagnostic review, initiated by |
| young salesman was short on experience. The | | | | your sales support team, is the first step in |
| young salesman felt that the purchasing agent | | | | preparing for consignment. The review |
| actually enjoyed watching him squirm month | | | | involves your entire organization and |
| after month. This young salesman, being | | | | represents a complete and thorough assessment |
| enthusiastic and energetic, tried every sales | | | | of the customer's current operating |
| technique he had ever learned. Of course, the | | | | environment. It provides the base of |
| scruffy old purchasing agent was familiar | | | | reference for all future consignment |
| with every one of them and had seen them many | | | | activities. It is primarily a data collection |
| times before. Nothing seemed to work on this | | | | and operational analysis effort which defines |
| guy. The young man just couldn't reach him. | | | | the consignment opportunities and the |
| So, he went back to something very basic that | | | | challenges that must be met for |
| most of us in sales (especially we Baby | | | | implementation. It includes an assessment |
| Boomers) learned from day one. The young | | | | of:- Operations- Material Flow- Material |
| salesman reflected on the words spoken by his | | | | Storage- Organization- Market RequirementsThe |
| most cherished mentor, "Build a relationship | | | | diagnostic review results in a thorough |
| son. Get the man to like you and he'll tell | | | | understanding of the barriers, constraints |
| you how to do business with | | | | and opportunities to implementing the |
| him."ExpectationsWell, the young man tried | | | | consignment partnership. It provides the |
| and tried, but even that didn't seem to work. | | | | baseline for assessing improvement |
| He was ready to give up. He was tired of | | | | opportunities and for developing the |
| repeatedly hearing that same pathetic | | | | consignment strategy. Failure to perform the |
| purchasing agent's theme song, "I'm happy | | | | diagnostic review significantly reduces the |
| with my current suppliers."The young salesman | | | | probability of success for consignment |
| was not smart enough, did not have enough | | | | implementation. This can often negate any |
| scar tissue and was not confident enough to | | | | cost savings generated by the concept |
| reply, "Maybe that's because you have set | | | | itself.Once an account is determined eligible |
| your expectations way too low." Instead he | | | | and the diagnostic review has been completed, |
| resorted to his secret weapon, his rarely | | | | further development of the rules of |
| used prideful technique that only came out | | | | engagement include:- Minimum turn |
| when all else failed - He begged. "Mr. | | | | rate- Number of items to be |
| Customer, is there anything I can do, | | | | consigned- Stocking location- Who will do the |
| anything at all that will convince you to | | | | count- How damaged goods will be |
| give me a chance to do business with | | | | handled- What the replenishment cycle will |
| you?"Have you ever been in the midst of a | | | | be- What the billing procedure will be- What |
| sales presentation and feel a knockout punch | | | | the billing cycle will beOther criteria that |
| land on your chin? Well, that's how the reply | | | | is specific to the customer in question |
| felt to the young salesman. "Look, we have a | | | | should be added to this list.JIT on |
| partnership with our current supplier. The | | | | SteroidsConsignment partnerships act like |
| only way you could ever do business with me | | | | Just-in-Time programs on steroids. They |
| is if you gave me our steel for free," the | | | | provide all the benefits of Just-in-Time |
| purchasing agent barked. | | | | without the high transaction cost, purchasing |
| | | | management stress and risk of stock outs.It |
| The young salesman was devastated; He saw | | | | is extremely important to get as much |
| the thrill of victory vanish before his eyes, | | | | specific information as possible directly |
| as he tasted the agony of final defeat. He | | | | from the customer. When you do your "cost |
| walked away from that call with his tail | | | | savings analysis" and your "price is not the |
| between his legs. | | | | same as cost demonstration," you will face |
| | | | less of a challenge if the bulk of your |
| The young salesman was down and depressed. | | | | information comes from the customer, thereby |
| He was in one of those typical valleys | | | | increasing their perceived accuracy of your |
| anybody who is or has ever been in sales | | | | assumptions.The following information is |
| recognizes. The best way to pull ourselves | | | | critical to the success of your sales |
| out is to make a buddy call - a call on one | | | | presentation. Your objective is to get as |
| of our best customers, based not on revenue | | | | much accurate information as possible from |
| but on friendship; one of those frequent | | | | the customer. That information should |
| calls we make and get criticized for making | | | | include:- Average volume of purchases on |
| because the sales volume doesn't justify the | | | | items being considered for |
| number of times we visit."He was a friend," | | | | consignment- Average inventory of purchases |
| the young salesman thought. So he told him | | | | on items being considered for |
| the story. His friend and customer was | | | | consignment- Average number of turns on items |
| sympathetic, understanding and even though he | | | | being considered for consignment- Average |
| didn't offer any advice, the young salesman | | | | cost per transaction (Customer generally |
| recaptured his spirit. That night as he sat | | | | doesn't know the answer to this one, but use |
| on his front porch reflecting on the day, he | | | | whatever number he guesses. Industries |
| thought, "Why not? Why not give him our | | | | average between $30 per transaction to as |
| product for free?" Full of excitement, the | | | | high as $85 per transaction.)- Annual average |
| next morning he went directly to his boss, | | | | inventory write-offs- Cost of cycle |
| the owner of the small privately held | | | | counting- Cost of annual physical inventory |
| company. He convinced the owner of the | | | | including reconciliation- Number of stock |
| integrity of his new plan.A concept was | | | | outs per year and cost of a stock out |
| bornThe concept of consignment in steel | | | | |
| distribution was born. That happened in the | | | | If your customer can't answer these |
| mid 1980's. Consignment was already being | | | | questions, try to help them come up with |
| used in the fastener industry but I do not | | | | their best guesstimate before you resort to |
| recall anybody in the steel distribution | | | | using industry estimates. The idea is that it |
| industry using it. But, as we, the young | | | | is difficult for the customer to challenge a |
| salesman and me, his boss, found out, the | | | | number that they created.Consignment |
| concept of consignment can work in any | | | | BenefitsConsignment benefits, pure and |
| industry. It was a tough sell, not so much to | | | | simple, equate to cost reductions. These cost |
| the customer, but to me as his boss. But, we | | | | reductions include: |
| did it and it was successful. The prospect | | | | |
| this young salesman almost walked away from | | | | - Reduction or redeployment of |
| became our largest account, purchasing over | | | | personnel- Reduction of transaction |
| $4 million by the end of the second year. It | | | | costs- Reduction of handling costs- Reduction |
| became a learning experience for both of us | | | | of insurance costs- Reduction of inventory |
| and we both profited from it. And the large | | | | taxes- Vendor consolidations- Reduction of |
| burly looking purchasing agent actually did | | | | interest costs- Elimination of opportunity |
| become one of the young salesman's closest | | | | costs- Elimination of stockoutsA primary |
| friends.Consignment can become a very | | | | objective of consignment is to reduce the |
| effective marketing tool if it is used | | | | customer's cost of carrying inventory. This |
| correctly. The emphasis is on using it | | | | includes the cost of money, shrinkage, taxes, |
| correctly. A consignment partnership should | | | | handling and storage. Typically, these |
| not be considered without establishing | | | | handling costs range from 18-30% of the |
| specific criteria for selecting appropriate | | | | average inventory value.Additional benefits |
| accounts up front. This is extremely | | | | to the customer |
| important to you, the supplier. We call this | | | | include:- Flexibilityo Material is always in |
| selection criteria the "Rules of | | | | stock at no cost until the material is |
| Engagement."In contrast to the normal Rules | | | | released for production. Quantities available |
| of Engagement in selling, consignment Rules | | | | can be altered to meet peak demands as well |
| of Engagement are predetermined by the | | | | as downturns.- Reduction of dollar investment |
| supplier, not the customer. Of course, the | | | | in inventoryo Consignment partnership |
| rules can be modified with proper approval to | | | | provides an alternate use of capital and |
| fit different situations. However, a | | | | customers will not be invoiced for material |
| consignment partnership must be a win-win | | | | until released for production. It also |
| relationship in order to be successful.Rules | | | | provides emergency safety stock for |
| of EngagementThe specific criteria that need | | | | production with no inventory investment |
| to be determined before a consignment | | | | cost.- Shorter lead timeso Normal lead times |
| partnership is offered include:- What is the | | | | would be approximately 1-2 days, however, the |
| minimum annual sales volume you are willing | | | | consignment partnership eliminates lead time |
| to accept?- What are the minimum annual gross | | | | as material is always in stock and available |
| margin dollars you are willing to | | | | at the customer's plant.- Assures growth |
| accept?- Are financial statements available | | | | opportunityo Consignment partnerships provide |
| for your review?- Is the customer financially | | | | the availability of consistent quality. |
| secure?- How much risk/investment are you | | | | Quantities and pricing are not subject to |
| willing to accept in off-site customer | | | | restrictions based on changing market |
| inventory?Answers to these preliminary | | | | conditions. Consignment partnerships enable |
| questions need to be established in addition | | | | us to effectively manage the supply chain, |
| to others that may pertain to your product | | | | thus ensuring the lowest total |
| and industry.An Assessment of the Consignment | | | | cost.- Pricingo Pricing will be consistent |
| PartnershipEven today in many industries, | | | | regardless of quantity used. (No Extras) The |
| consignment is on the leading edge of custom | | | | price for one item is the same as the price |
| designed cost reduction programs. Initiatives | | | | for 100 items.- Vendor reductiono Reducing |
| focus on total cost, not price, in order to | | | | the number of vendors, consolidating sizes, |
| move to the next level of partnering, | | | | parts, communication and administration can |
| surpassing expensive JIT programs that have | | | | contribute to overall cost reductions - |
| high administrative costs and service risks. | | | | substantial reduction in debits and |
| | | | credits.- Generalo The intent of this program |
| The major objective of a consignment | | | | is designed to offer overall cost reductions, |
| partnership is to reduce costs by eliminating | | | | flexibility in scheduling, improved cash |
| inventory and duplicate effort, as well as | | | | flow, reduction in inventory and investment, |
| reducing shrinkage and lowering transaction | | | | assured growth opportunities and to enhance |
| and handling costs. It is also effective in | | | | long-term vendor relationships.This results |
| reducing scrap, rework, equipment downtime, | | | | in the true meaning of partnership, a win-win |
| lead-time and over production.As consignment | | | | relationship. A customer may ask the |
| becomes recognized in the marketplace as the | | | | question, "How can you provide all these |
| "way of the future," caution should be | | | | services without charging a substantial |
| exercised due to the lack of experience and | | | | premium on pricing?" The answer is simple. |
| misconceptions by the | | | | Consignment is a partnership that provides |
| competition.Misconceptions include:1: | | | | benefits to both parties. Your benefits as a |
| Consignment is a Supplier Program | | | | supplier include:- Locking out |
| | | | competition- Better control of inventory- No |
| Consignment does not start with a company | | | | warehouse space required for |
| supplier seminar where you ask the customer | | | | growth- Regularly involved at customer |
| how much he wants to stock on his floor. | | | | location- First chance at new |
| Consignment is complex, requiring supplier | | | | opportunities- Hard to cancel - hard to |
| professional expertise, state of the art | | | | duplicate- Customer becomes supplier |
| technological MIS and a true commitment of a | | | | dependent- Free storage space at the |
| joint partnership throughout both | | | | customer's facility |
| organizations.2: Consignment is Just Another | | | | |
| Program/Project | | | | Happy Ending?We started this article in |
| | | | storybook fashion. Consignment may sound like |
| Because consignment is a total | | | | the "Knight in Shining Armor," the "Magic |
| organizational philosophy on both the | | | | Bullet," or the answer to cracking your |
| customer's part and the supplier's part, | | | | toughest challenge. Be cautious. Not every |
| implementation extends beyond the purchasing | | | | story has a happy ending. You can hurt |
| department. Consignment requires | | | | yourself with consignment. Consignment is a |
| organization, education and training, | | | | serious program that requires serious |
| especially with front line supervision and | | | | investment of assets and resources. Make sure |
| labor on the shop floor.3: Consignment is | | | | you do your homework in the beginning. |
| Easy and Can be Implemented Quickly | | | | Consignment is not right for every account. |
| | | | It should be the exception, not the rule. |
| Consignment is not easy although consignment | | | | But, if it's done right, it can be the |
| customers may think so. However, you can make | | | | "Knight in Shining Armor." So, if you've done |
| it easy because of your years of experience, | | | | your homework and all the pieces fall into |
| expertise and support from your IT | | | | place, go for it. And, when that purchasing |
| department. Consignment requires | | | | agent says to you that he's happy with his |
| organizational change and, in some cases, | | | | current suppliers, don't be afraid to look |
| physical plant changes. Cultural transition | | | | him in the eye and, without cracking a smile, |
| barriers can extend the process. Sustaining | | | | reply very slowly..."Maybe that's because you |
| the continuous improvement philosophy of | | | | have set your expectations way - too - |
| consignment is critically dependent on | | | | low!"Dr. Eric "Rick" Johnson () is the |
| organizational transition.Implementation of | | | | founder of CEO Strategist LLC. an experienced |
| consignment requires a plan, an | | | | based firm specializing in leadership. CEO |
| implementation team, a commitment from both | | | | Strategist LLC. works in an advisory capacity |
| parties and staying power to build a | | | | with company executives in board |
| partnership seeking continuous cost | | | | representation, executive coaching, team |
| savings.How do you know if consignment is | | | | coaching and education and training to make |
| right for a particular account?First, | | | | the changes necessary to create or maintain |
| determine which accounts may or may not be | | | | competitive advantage. You can contact them |
| eligible for consignment. At a minimum, you | | | | by calling 352-750-0868, or visit for more |
| should consider the following:- Financial | | | | information.Rick received an MBA from Keller |
| stability. Since consignment involves the | | | | Graduate School in Chicago, Illinois and a |
| physical transfer of inventory to your | | | | Bachelor's degree in Operations Management |
| customer's location before he has paid, you | | | | from Capital University, Columbus Ohio. Rick |
| should be sure that he will remain solvent | | | | recently completed his dissertation on |
| throughout the program. Financial reports are | | | | Strategic Leadership and received his Ph.D. |
| the preferred method of validating | | | | He's also a published book author with four |
| stability.- Minimum level of revenue desired. | | | | titles to his credit: "The Toolkit for |
| This needs to be determined to justify the | | | | Improved Business Performance in Wholesale |
| investment not only of inventory, but of | | | | Distribution," the NWFA & NAFCD "Roadmap", |
| other resources to manage the | | | | Lone Wolf-Lead Wolf-The Evolution of Sales" |
| program.- Minimum volume level on items. The | | | | and a fiction novel, "Shattered Innocence. |